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CFTC sets new requirements, admits NFA needs to improve
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CFTC sets new requirements, admits NFA needs to improve

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CFTC sets new requirements, admits NFA needs to improve

Source: CFTC to roll out new set of requirements aimed at enhancing client protection and market transparency, admits NFA needs to improve | Forex Magnates

Today CFTC’s Chairman Gary Gensler gave a testimony before the U.S. Senate Committee on Agriculture. The testimony focused on PFG, the reform CFTC is structuring aimed at improving its oversight of FCMs, SROs (Self Regulatory Organizations) such as the NFA and basically trying to reinstate customer confidence in financial markets.

It’s interesting to see CFTC actually admitting (in a very limited scope of course..) that it together with the NFA failed in preventing PFG’s fraud: “The NFA and CFTC staff over the years did not detect Mr. Wasendorf’s alleged stealing of customer funds, which came to light only a few weeks ago. Though the local police cannot prevent every bank robbery and market regulators cannot prevent every financial fraud, we all must do better. We must do everything within our authorities and resources to strengthen oversight programs and the protection of customer funds.”

Comparison to local police and robbers isn’t exactly appropriate as there are x50 more robbers than policeman while CFTC has probably more employees than the number of FCMs it oversees.

CFTC Customer Protection Reforms to Date

The Commission has been actively working to improve protections for customer funds. This includes:

The completed amendments to rule 1.25 regarding the investment of funds bring(ing) customers back to protections they had prior to exemptions the Commission granted between 2000 and 2005. Importantly, this prevents use of customer funds for in-house lending through repurchase agreements;

Clearinghouses will have to collect margin on a gross basis and FCMs will no longer be able to offset one customer’s collateral against another and then send only the net to the clearinghouse;

The so-called “LSOC rule” (legal segregation with operational comingling) for swaps ensures customer money is protected individually all the way to the clearinghouse; and

The Commission included customer protection enhancements in the final rule for DCMs. These provisions codify into rules staff guidance on minimum requirements for SROs regarding their financial surveillance of FCMs.

In addition, last month, we approved an NFA proposal that stemmed from a coordinated effort by the CFTC, the SROs, and market participants, including from the CFTC’s two-day roundtable earlier this year on customer protection.

The three key areas of reform included in the NFA rules are:

First, FCMs must hold sufficient funds in Part 30 secured accounts (funds held for U.S. foreign futures and options customers trading on foreign contract markets) to meet their total obligations to customers trading on foreign markets computed under the net liquidating equity method. FCMs will no longer be allowed to use the alternative method, which had allowed them to hold a lower amount of funds representing the margin on their foreign futures;

Second, FCMs must maintain written policies and procedures governing the maintenance of excess funds in customer segregated and Part 30 secured accounts. Withdrawals of 25 percent or more of excess funds in these accounts (that are not for the benefit of customers) must be pre-approved in writing by senior management and reported to the NFA; and

Third, FCMs must make additional reports available to the NFA, including daily computations of segregated and Part 30 secured amounts, as well as twice monthly detailed information regarding the cash deposits and investments of customer funds.

CFTC is also becoming very aggressive on how it intends to monitor client funds held with FCMs by finally combining requirements and pro-active oversight:

First, we must incorporate the NFA rules approved last month into the Commission’s regulations so that the CFTC can directly enforce these important reforms.

Second, I believe it is critical that we bring the regulators’ view of customer accounts into the 21st century. We must give the SROs and the CFTC direct electronic access to FCMs’ bank and custodial accounts for customer funds, without asking the FCMs’ permission. Further, acknowledgement letters (letters acknowledging that accounts contain segregated customer funds) and confirmation letters must come directly to regulators from banks and custodians.

Third, I believe we need more transparency to customers about their funds. Futures customers, if they wish, should have access to information about how their assets are held and with whom, similar to that which is available to mutual fund and securities customers.

It seems CFTC is not entirely happy with the NFA as “Recent CFTC examinations of the NFA included recommendations for clearer documentation of audit procedures, enhanced training and supervisory review procedures, and establishing requirements for the filing of amended financial statements.”

It would be much more sensible for the CFTC to fine NFA if it found deficiencies in its practices, just like NFA does with its members, however CFTC chose to increase the oversight of SROs such as the NFA internally: “The CFTC also has implemented a significant restructuring, based on a new strategic plan, regarding our oversight of SROs and intermediaries.

The CFTC last year established a new division dedicated solely to the oversight of the SROs and intermediaries. We created a branch within the division to specifically oversee examinations. We were able to attract talented individuals from the private sector with many years of relevant experience to lead this new division and branch. We have begun the process of strengthening our examination program, including adding risk and control elements.”

This seems like first steps in the right direction. Customer confidence in financial markets, including in brokers and banks, has never been lower. Brokers worldwide and in US in particular struggle to cope with the negative image isolated cases like PFG and MF have given to the whole financial industry and many clients say the same simple thing: “We don’t know whom to trust anymore”.

Unless confidence and transparency is brought back to the market these customers may never be able to trust their broker again. It’s important to note that this confidence will not be restored by introducing rules that will actually make it even more difficult for honest brokers to operate or through certain SROs over-zealousness for going after their members, but through realistic and constructive measures that will assure both brokers and traders can easily operate in a safe system.


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They need to force FCM's to get private insurance on customer funds, then force them to publicly post the rates paid to the insurance companies in premium paid per million dollars insured.

FCMs would then be more than happy to open their books to the insurance company audits to get the lowest rates. This would encourage transparency.

Then cut the staffs of the regulators since they would no longer be needed to police customer funds, only other types of transgressions.

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CFTC Public Roundtable on PFG

This week the CFTC will be holding a public roundtable to address the concerns of traders in response to the bankruptcies of PFG and MF Global. FXCM would like to announce its own proposals to help restore confidence for futures and forex traders in the United States.

Proposals to Bring Full Market Transparency and Accountability to the Futures/Forex Industry

The collapse of PFG Best (following so closely after the collapse of MF Global) has sent shockwaves all across the United States. The trading public has serious concerns about the integrity of the futures market and many are questioning whether Futures Commission Merchants (FCM’s) can be trusted to hold client funds. There exists today a crisis of confidence amongst retail futures and forex traders that has never existed before. If not addressed immediately, these markets will be irreparably damaged for years to come.

The following proposals are intended to bring market transparency to the industry by restoring investor confidence in FCM’s.

1) Require All FCM’s to Publicly Publish Their Financials Once a Quarter:

Currently, the CFTC publishes monthly “Net Capital” reports that disclose to the public how much money a Futures Commission Merchant has set aside in capital. However, that report provides very little insight into how well the company is doing financially. By requiring FCM’s to publish their audited financials the trading public will know how much risk they are taking with each firm since investors will be able to weigh the liabilities along with the excess capital that a Futures Commission Merchant has.

Furthermore, the published financial statement should include everything (i.e. holding company’s financials) since what happens to other subsidiaries of the company can easily effect the regulated FCM. Each company should be required to provide a link to its financials on its own homepage so that the public can do its proper due diligence.

Too often, those FCM’s that are teetering on the edge of bankruptcy lure customers in by offering unsustainable gimmicks (dirt cheap commissions, account opening bonuses) that temporarily puts off the inevitable. Customers should be aware of the perilous finances of those FCM’s that would offer these kinds of gimmicks before opening an account with such a firm. PFG Best was a classic example of a firm that used such gimmicks as they routinely low balled their competitors with uneconomical discounts that no reputable, legally compliant firm could match.

2) Require all FCM’s to Employ a Top Ten Accounting Firm:

There need to be much higher accounting standards than currently exist in the FCM world. The Platt Group publishes an annual ranking of public accounting firms that could be used by FCM’s. Whether it is top 10 or top 25, the main point is that FCM’s must use a nationally recognized and respected accounting firm that could apply the same tough standards to FCM’s that publicly traded companies must meet.

The Public Trust
While no one proposal will guarantee that a future FCM will not fail, these proposals will help restore the confidence of traders by bringing greater market transparency and accountability into the world of futures/forex trading.

Traders can show their support for these proposals by leaving comments in the public comments section of the CFTC homepage.

Charles Delano
Director of Government Affairs

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